Personal Income Tax
Midterm Exam
Course Introduction
This course provides an in-depth examination of the principles and practices of personal income taxation. It covers the structure of the federal income tax system, including the determination of taxable income, allowable deductions and credits, tax planning strategies, and filing requirements for individuals. Students will explore relevant tax laws, analyze various sources of income, and learn to prepare individual tax returns. Emphasis is placed on current tax regulations, compliance, ethical considerations, and the impact of taxation on personal financial decision-making. Practical examples and case studies will be used to develop applied tax skills and knowledge.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Individuals 27th Edition by Timothy J. Rupert
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18 Chapters
2027 Verified Questions
2027 Flashcards
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Chapter 1: An Introduction to Taxation
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Sample Questions
Q1) Which of the following taxes is progressive?
A)sales tax
B)excise tax
C)property tax
D)income tax
Answer: D
Q2) Describe the steps in the legislative process for major tax reform.
Answer: 1.Treasury studies are prepared on needed tax reform.
2.President makes proposals to Congress.
3.House Ways and Means Committee prepares House bill.
4.Approval of House bill by the House of Representatives.
5.Senate Finance Committee prepares Senate bill.
6.Approval of Senate bill by the Senate.
7.Compromise bill approved by a Joint Conference Committee.
8.Approval of Joint Conference Committee bill by both the House and Senate.
9.Approval or veto of legislation by the President.
10.New tax law and amendments incorporated into the Code.
Q3) Mia is self-employed as a consultant.During 2013,Mia earned $180,000 in self-employment income.What is Mia's self-employment tax?
Answer: 11ea8235_58ff_fbac_bbd8_e3e6a22bec1e_TB5379_00
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Chapter 2: Determination of Tax
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Q1) Paul and Hannah,who are married and file a joint return,are in the process of adopting a child who is born in December 2013.The child,a son,comes to live with them a week after his birth on December 12.The adoption is not finalized until February of 2014.What tax issues are present in this situation?
Answer: Are Paul and Hannah able to claim the baby as a dependent on their 2013 tax return and claim a child tax credit?
Q2) Kelly is age 23 and a full-time student with interest and dividend income of $2,600 in the current year.The total cost of her support for the year is $19,000.She is not subject to the kiddie tax.
A)True
B)False
Answer: False
Q3) If an individual with a marginal tax rate of 15% has a long-term capital gain,it is taxed at A)0%.
B)20%.
C)10%.
D)15%.
Answer: A
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Chapter 3: Gross Income: Inclusions
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Q1) In order to be treated as alimony for tax purposes,payments must be made in cash.
A)True
B)False
Answer: True
Q2) Billy,age 10,found an old baseball glove while exploring his new home.His father,Al,took the glove to a dealer in baseball memorabilia who verified that the glove belonged to Babe Ruth.Al sold the glove for $75,000.What tax issues should Al consider? Answer: Al has $75,000 of income upon the sale of the glove.However,is there an argument that Billy is the owner of the glove since he found it,and he should be taxed on the proceeds? Does Billy giving the glove to Al constitute an assignment of income?
Q3) Under the economist's definition,unrealized gains,as well as gifts and inheritances,are income.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Exclusions
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Q1) The amount of cash fringe benefits received under a cafeteria plan is taxable to an employee.
A)True
B)False
Q2) Lindsay Corporation made the following payments to the family of Luke Marshall,an employee who died during the year. $5,000 for Luke's final paycheck that he failed to collect
$10,000 for accrued vacation days as required by the employment contract
$25,000 in admiration of Luke's outstanding service to the community
What is the total amount that Luke's family must include in income?
A)$0
B)$5,000
C)$15,000
D)$40,000
Q3) All of the following are requirements for excluding employee achievement awards except for
A)tangible personal property other than cash.
B)based on safety records or length of service.
C)part of a meaningful presentation.
D)if paid in cash,must be less than $400.
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Chapter 5: Property Transactions: Capital Gains and Losses
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Q1) Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.
A)True
B)False
Q2) Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses.
A)True B)False
Q3) Generally,gains resulting from the sale of collectibles such as antiques,stamps,or artwork are taxed at a maximum rate of 25%.
A)True
B)False
Q4) Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.
A)True B)False
Q5) Distinguish between the Corn Products doctrine and the ruling in the Arkansas Best Corporation case.
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Chapter 6: Deductions and Losses
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Q1) Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.
A)True
B)False
Q2) Under the wash sale rule,if all of the sold shares are not re-purchased within the relevant time period,a portion of the loss on the sale is allowed.
A)True
B)False
Q3) Taxpayers may deduct legal fees incurred in the acquisition of property.
A)True
B)False
Q4) A wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61 day period after the date of sale.
A)True B)False
Q5) List those criteria necessary for an expenditure to be deductible as business or investment expenses.
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Chapter 7: Itemized Deductions
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Sample Questions
Q1) Medical expenses paid on behalf of an individual who could be the taxpayer's dependent except for the gross income or joint return tests are deductible as itemized deductions.
A)True
B)False
Q2) Leslie,who is single,finished graduate school this year and began repaying her student loan.The proceeds of the loan were used to pay her qualified higher education expenses.She has not received any type of educational assistance or scholarships.The amount of interest paid during the year amounted to $3,800.What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?
A)$2,500 for AGI
B)$2,500 from AGI
C)$3,800 for AGI
D)$3,800 from AGI
Q3) Discuss the timing of the allowable medical expense deduction.
Q4) What is the treatment of charitable contributions in excess of the applicable limits for the current year?
Q5) Explain how tax planning may allow a deduction of qualified medical expenses.
Page 9
Q6) Explain why interest expense on investments is limited to net investment income.
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Chapter 8: Losses and Bad Debts
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Q1) Adam owns interests in partnerships A and B,both of which are Publicly Traded Partnerships.During the current year,Adam's share of the income from A is $12,000.Adam's share of B's loss is $3,500.B also generates portfolio income of which Adam's share is $2,000.What are the tax consequences of these income and loss items?
Q2) When the taxpayer anticipates a full recovery on a casualty loss of personal-use property but receives less than full recovery in a subsequent year,the unrecovered portion may be deducted.
A)True
B)False
Q3) Lewis died during the current year.Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000.Suspended losses of $15,000 were attributable to the property.How much of the suspended loss is deductible on Lewis's final income tax return?
A)$0
B)$2,000
C)$13,000
D)$15,000
Q4) What must an individual taxpayer prove to receive a worthless security deduction?
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Page 10
Chapter 9: Employee Expenses and Deferred Compensation
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Q1) Under a qualified pension plan,the employer's deduction is usually deferred until the employee recognizes income.
A)True
B)False
Q2) Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.
A)True
B)False
Q3) Tyler (age 50)and Connie (age 48)are a married couple.Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2013.Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan.They file a joint return; have interest and dividend income of $30,000.What is their maximum for AGI deduction for contributions to a traditional IRA?
A)$0
B)$5,500
C)$6,500
D)$12,000
Q4) What two conditions are necessary for moving expenses to be deductible?
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Q5) Why did Congress establish Health Savings Accounts (HSAs)? How do HSAs operate?
Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The straight-line method may be elected for depreciating tangible personal property placed in service after 1986.
A)True
B)False
Q2) Debbie's Donuts is planning a major expansion over the next several months,opening many new locations around the state.The company will be spending several million dollars on new equipment and furnishings.The company is debating whether to push to get them all opened by December 2013 or whether to gradually roll out the new locations from December through March.Discuss the tax considerations that should be taken into account.
Q3) In July of 2013,Pat acquired a new automobile for $28,000 and used the automobile 80% for business.No election is made regarding Sec.179.Assuming her business use remains at 80%,Pat can take a maximum depreciation deduction in 2013 of
A)$2,528.
B)$3,160.
C)$8,928.
D)$11,160.
Q4) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?
Page 12
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Chapter 11: Accounting Periods and Methods
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Sample Questions
Q1) All of the following are considered related for purposes of Section 453(e)installment sales except A)parents.
B)children.
C)sister.
D)controlled corporation.
Q2) A fiscal year is a 12-month period that ends on the last day of any month other than December.
A)True
B)False
Q3) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2.The builder's cost is estimated to be $1,800,000.The actual costs year 1 are $900,000 and year 2's actual costs are $1,100,000.Under the percentage of completion method year 1's gross profit is
A)$0.
B)$300,000.
C)$350,000.
D)$700,000.
Q4) What is the significance of the Thor Power Tool Co.case?
Q5) Discuss the purpose of the imputed interest rules.
Page 13
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Q1) Glen owns a building that is used in business.The building is worth $200,000,but is subject to a mortgage of $40,000.Glen's basis in the building is $120,000.Glen exchanges the building for investment land worth $150,000 plus $10,000 cash.In addition,the other party assumes the mortgage which will be held for investment.Glen must recognize a gain of
A)$0.
B)$10,000.
C)$50,000.
D)$80,000.
Q2) In an involuntary conversion,the basis of replacement property is its cost reduced by the gain deferred.
A)True
B)False
Q3) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business equipment with a $96,000 FMV.What is the amount of gain recognized on the exchange?
A)$0
B)$4,000
C)$6,000
D)$10,000
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Chapter 13: Property Transactions: Section 1231 and Recapture
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Q1) Sec.1231 property must satisfy a holding period of more than one year.
A)True
B)False
Q2) Sec.1245 ordinary income recapture can apply to buildings placed in service prior to 1987.
A)True
B)False
Q3) For a business,Sec.1231 property does not include
A)timber,coal,or domestic iron ore.
B)inventory purchased 24 months ago.
C)an office building purchased five years ago.
D)land used in the business that was purchased two years ago.
Q4) Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec.1250 provided for the recapture of all depreciation and not just additional depreciation.
A)True
B)False
Q5) The sale of inventory results in ordinary gain or loss.
A)True
B)False
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Q1) During the year,Jim incurs $50,000 of rehabilitation expenditures in connection with a certified historic structure used in his business.The adjusted basis of the structure was $40,000 at the time the rehabilitation began.
a.What is the amount,if any,of his rehabilitation credit for the year?
b.What is the depreciable basis of the rehabilitation expenditures?
Q2) Ava has net earnings from self-employment of $125,000.She also earned salary of $170,000 from a job held earlier in the year.How much Additional Medicare Tax will be owed on the self-employment income?
A)$0
B)$855
C)$1,125
D)$3,625
Q3) Discuss the tax planning techniques available to a U.S.citizen who is on a foreign job assignment.
Q4) Self-employment taxes include components for
A)Medicare hospital insurance and SUTA.
B)OASDI and FUTA.
C)FICA and FUTA.
D)OASDI and Medicare hospital insurance.
Page 16
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Chapter 15: Tax Research
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Q1) Compare and contrast "interpretative" and "statutory" regulations.
Q2) According to the Statements on Standards for Tax Services,if a CPA believes that a client's prior-year tax return contains false information,the CPA should report this to the A)IRS.
B)SEC.
C)AICPA.
D)None of the above.The CPA does not report the false information to any external agencies,unless required by law.
Q3) The term "tax law" includes
A)legislation.
B)treasury regulations.
C)judicial decisions.
D)all of the above
Q4) Which of the following documents is issued by the IRS to a specific taxpayer?
A)regulation
B)revenue procedure
C)letter ruling
D)information release
Q5) Is it possible for the Tax Court to intentionally issue conflicting decisions?
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Chapter 16: Corporations
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Q1) Oak Corporation manufactures widgets in its factory in Houma,Louisiana.Its taxable income (before the production deduction)is $200,000 and its net income from qualified production activities is $180,000.What is the amount of Oak Corporation's qualified production activities deduction?
Q2) Johnson Corporation has $300,000 of AMTI before the exemption.What is the tax base for AMT?
Q3) Discuss the tax consequences of a complete liquidation to the liquidated corporation and to the shareholders.
Q4) Indicators of possible exposure of accumulated earning tax risk would include all of the following except
A)substantial marketable securities held by the corporation.
B)loans to shareholders.
C)limited dividend paying history.
D)All of the above factors could indicate retention of earnings beyond business needs.
Q5) The term "thin capitalization" means that the corporation is financed primarily with capital stock rather than debt.
A)True
B)False
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Chapter 17: Partnerships and S Corporations
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Q1) Worthy Corporation elected to be taxed as an S corporation on January 1,of last year,effective last year.It had previously been a C corporation.On the effective date of the S election,Worthy had land with a $70,000 basis and a $210,000 FMV.No net unrealized losses exist on the date of the S corporation election.The land is sold this year for $250,000.The tax result of the sale by Worthy is A)no gain or loss recognized.
B)a Sec.1231 gain of $180,000,none of which is subject to the built-in gains tax.
C)a Sec.1231 gain of $180,000,all of which is subject to the built-in gains tax.
D)a gain of $140,000 subject to the built-in gains tax and passes though to shareholders,plus a $40,000 gain subject to on the regular S-corporation pass-through rules.
Q2) What is the effect of a change in a partner's interest in the partnership during the year?
Q3) An S corporation can have both voting and nonvoting common stock as long as the shares of stock have identical rights to share in the profits and assets of the corporation.
A)True
B)False
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Chapter 18: Taxes and Investment Planning
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Q1) The general form of the annualized after-tax rate of return (annualized ATROR)can be expressed as
A)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 - t<sub>n</sub>)+ t<sub>n</sub>]<sup>1/n</sup> - 1.
B)r<sub>ann</sub> = [(1 - R)<sup>n</sup>(1 - t)+ t]<sup>1/n</sup> - 1.
C)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 + t)+ t]<sup>1/n</sup> - 1.
D)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 + t)- t]<sup>1/n</sup> - 1.
Q2) Melanie is in the 39.6% tax bracket and is ineligible to make deductible or Roth IRA contributions.Nevertheless,she wishes to contribute $5,500 to a traditional nondeductible IRA.How much taxable salary must she earn to have $5,000 left for the contribution?
Q3) The Flow-Through Model used for S corporations and partnerships is an application of the
A)Pension Model.
B)Current Model.
C)Deferred Model.
D)Exempt Model.
Q4) In the Current Model,investment earnings are taxed currently.
A)True
B)False
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